Risk Chat: Closing-Process Problems

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The primary risk with the quarterly closing process is reporting erroneous or inaccurate numbers or missing a key disclosure.

Do you speak XBRL? It’s an important question for finance professionals, who have been forced to pick up a second financial-reporting language in response to SEC rules requiring the use of the reporting format. Ken Fritz, executive vice president of Trintech, points to crash courses in XBRL as one of the primary closing-process challenges finance folks must contend with. These challenges give rise to risks that can cause companies to miss filing deadlines.

In this Risk Chat, Fritz offers some considerations for finance executives and managers to address closing-process challenges and mitigate related risks.

 

Generally, what is different today compared to five years ago about the quarterly closing process?

Ken Fritz:The most notable change to the quarterly closing process in the past five years is the increase in SEC regulations for publicly traded companies, particularly XBRL. This new reporting format was added to existing requirements and is essentially an electronic barcode on information in reporting documents, such as 10Qs and 10Ks, to provide consistency across all filings. It is effectively a foreign language that financial teams had to become fluent in very quickly. The new requirement was introduced by the SEC without extending filing deadlines, which increases pressure on reporting groups during the closing process.

Furthermore, the persistently weak economy has resulted in a continual drumbeat for additional information, which puts additional pressure on the finance team during the close. Companies can help alleviate these pressures and reduce risk by using technology to automate the closing process.

 

What are the primary risks associated with the quarterly closing process today?

Fritz:The primary risk is reporting erroneous or inaccurate numbers or missing a key disclosure, which can be the result of a process failure or faulty controls.

If a company misses a new disclosure or includes a material error in one of the numbers or information that’s reported, it can lead to bigger problems, such as an amendment or fine. If the process fails or an internal control is faulty, there is liability for the company and even personal liability for the executives who signed off on the filing.

To avoid these risks, the bigger question that companies should ask is, what kind of visibility do they have into their process and controls? Is the team following the process to produce accurate numbers?

 

What are some of the issues that arise if these threats come to fruition?

Fritz:Missing a filing deadline is one of the most common issues that arises from insufficient processes and controls, and XBRL only exacerbates the situation. Not only does a company have to identify what went wrong, but it also has to translate the new information into the XBRL format, which can take a substantial amount of time and cause a company to miss its deadline.

Another scenario is that a company finds an error after filing its reports, which requires an amendment. The Street typically punishes companies for restatements and amendments because they indicate weak internal controls and hint at bigger problems. It could result in a fine from the SEC, but the bigger issue is generally the hit to the company’s stock and credibility with investors.

 

At a high level what are some considerations finance managers should weigh as they address these risks?

Fritz:It is essential for finance managers to have visibility into the entire record-to-report process to ensure that they report accurate results and meet the SEC’s disclosure deadlines. Here are some key questions to ask:

• Do I have visibility into all of the closing and reporting activities from the point in time when the books are closed to when information is disclosed to stakeholders, regulators and the public?

• Can I look at all the activities that go into producing a disclosure, and do I have transparency into that process?

• Can I monitor and measure what’s happening in the process so that I can manage it?

• What steps have I taken as a manager to improve both the effectiveness and the efficiency of the overall process?

• Am I doing all of the right things versus just doing what’s right?

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GRC expert Eric Krell supplies the Business Finance community in-depth articles and commentary examining governance, risk, and compliance.

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